PART 1US REAL ESTATE MARKET IS VERY TRANSPARENT
PART 2COMMISSIONS ARE PAID BY THE SELLER
PART 3NO EXTRA STAMP DUTIES FOR FOREIGN BUYERS
PART 4FOREIGN BUYERS SHOULD FOCUS ON CONDOS, NOT COOPS
PART 5FINANCING IS READILY AVAILABLE TO FOREIGN BUYERS
PART 6INVESTORS PAY NO TAX ON RENTAL INCOME FOR THE FIRST 10-15 YEARS OF FINANCING
PART 7FOREIGN BUYERS MUST ELECT TO OFFSET EXPENSE FOR INCOME TAX
PART 8FIRPTA WITHOLDING
PART 9FOREIGN BUYERS MUST PLAN TO AVOID THE ESTATE TAX or DEATH TAX
PART 10FOREIGN BUYERS SHOULD CONSULT WITH THEIR HOME COUNTRY TAX SPECIALISTS
PART 11FOREIGNERS CAN DEFER CAPITAL GAINS TAXES BY BUYING ANOTHER INVESTMENT PROPERTY
PART 12FOREIGN BUYERS DO NOT HAVE TO BE IN THE US TO CLOSE THE DEAL
PART 1 US REAL ESTATE MARKET IS VERY TRANSPARENT
The US real estate market is very transparent, especially compared to many other countries. Closed sales transaction data becomes publicly available within 60 days after closing. In addition, agents are required to publicly post their exclusive listings within 24 hours, giving all agents access to inventory for sale.
Accordingly, a buyer doesn’t need to go from agent to agent to find a property. We have access to all homes and apartments for sale in New York City and Miami and can assist our buyers in the purchase of any one of them. Since we are well-connected real estate agents, we can help distinguished buyers find and secure the best properties, even when they haven’t been listed for sale yet.
PART 2 COMMISSIONS ARE PAID BY THE SELLER
Broker sales commissions are always paid by the seller (and then divided equally between both the buyer’s and seller’s brokers), so buyers don’t pay anything to have a buyer’s agent working on their behalf. This is called co-broking and represents over 80% of sale transactions in the US.
It is always advisable for a buyer to work with their own buyer agent and not the seller’s agent. An Exclusive Buyer Agent will protect the buyer’s interests in the transaction. The seller’s agent will not—they work for the seller!
PART 3 NO EXTRA STAMP DUTIES FOR FOREIGN BUYERS
To deter foreign buyers, London, Hong Kong, Singapore, Vancouver, Melbourne and Sydney all impose an extra stamp duty (ranging from 7% to 30%of the purchase price) on non-residents purchasing property. That’s not the case in the US. Foreign buyers are treated equally as US buyers in this regard.
PART 4 FOREIGN BUYERS SHOULD FOCUS ON CONDOS, NOT COOPS
Generally, co-ops are for a primary residence. Foreign buyers, therefore, should focus on purchasing condos, condos, houses or townhomes. Unless the buyer has a long history of working and living in the US, co-ops are generally out of reach, as they require the buyer’s main source of income to be from the US and the bulk of their assets to reside in the US.
Co-ops require this because they are ultra-conservative corporations that know it would be very difficult to collect on a judgment issued against one of their foreign owners in the event of a lawsuit. Even if a corporation obtained a judgment against a foreign owner, it would likely be uncollectible since the owner’s assets would be sitting in another country, outside the jurisdiction of US courts.
HSBC is one of the best retail banks offering mortgages to foreigners. Other private banks like JP Morgan Chase, BNY Mellon and Citi Private all provide mortgages to foreigners, often at very good rates.
PART 5 FINANCING IS READILY AVAILABLE TO FOREIGN BUYERS
Qualified international buyers can obtain financing for properties through retail banks or private banks. Generally, retail banks will offer these terms:
PART 6 INVESTORS PAY NO TAX ON RENTAL INCOME FOR THE FIRST 10-15 YEARS OF FINANCING
Investors who finance their purchases will likely not pay income taxes on the net rental income for the first 10 to 15 years since the US government is very generous in allowing expenses to be deducted from rental income. This is true for both local and foreign investors. Deductions from rent include the following main expenses:
PART 7 FOREIGN BUYERS MUST ELECT TO OFFSET EXPENSE FOR INCOME TAX
Foreign nationals must elect to pay US income taxes on any net income (rental revenues minus expenses) derived from rental property. If this election is not made in a timely fashion (for example, if US income tax returns not filed), a tax of 30% of the gross rental income will be assessed. Under this scenario, the investor would not be able to deduct any expenses, including depreciation, interest, property taxes, common charges, etc. Even if the Foreign Investor is incurring tax losses in the beginning years of their investment, and therefore doesn’t owe any taxes to the government, they still must file their tax returns in a timely manner to make the election.
PART 8 FIRPTA WITHOLDING
When a non-resident sells US property, the Internal Revenue Service wants to be sure they get paid capital gains taxes. Accordingly, under the Foreign Investment in Real Estate Property Tax Act (FIRPTA for short), the IRS withholds 10% of the gross purchase price of the property. When a US tax return is submitted reporting the capital gains tax, if there is any refund due, that money will be refunded to the filer.
PART 9 FOREIGN BUYERS MUST PLAN TO AVOID THE ESTATE TAX or DEATH TAX
When a Foreign Buyer dies, his or her estate will be taxed by the federal government at close to 46%. While US citizens and Green Card holders are exempt for the first $5.45 million (with married couples exempt $10.9 million), non-US citizens are exempt only $60K. With some upfront estate tax planning, however, foreign buyers can either eliminate the tax or hedge against it.
Using a Foreign Corporation structure (that is, BVI, Cayman, etc.) as the vehicle to purchase a property, the foreign owner would not be subject to the estate tax. The owner would own shares in a foreign corporation, which are not subject to the US estate tax. Corporate tax rates, however, are higher than individual rates, so using the foreign corporation is not always the best structure.
To hedge against the estate tax, many of our foreign clients use a term life insurance policy to cover the tax and provide for one’s heirs in the event of death.
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PART 10 FOREIGN BUYERS SHOULD CONSULT WITH THEIR HOME COUNTRY TAX SPECIALISTS
Depending on the home country of a foreign buyer, their overall tax liability may be different than that of a US resident, and may be higher or lower than other foreign buyers. This depends on the tax treaty a foreign buyer’s home country has signed with the US, if any. Consult with a local tax lawyer who is familiar with the specifics of your home country’s US tax treaty for clarity surrounding your specific tax liabilities.
PART 11 FOREIGNERS CAN DEFER CAPITAL GAINS TAXES BY BUYING ANOTHER INVESTMENT PROPERTY
The US government allows all sellers to use Section 1031 of the IRS Code to defer capital gains taxes. By exchanging one property for the other, the tax basis of the old property is transferred to the new property, effectively allowing the buyer to buy the new property pre-tax. Ultimately, the rules are quite complex and should be followed closely, otherwise, the transaction won’t qualify for deferral.
PART 12 FOREIGN BUYERS DO NOT HAVE TO BE IN THE US TO CLOSE THE DEAL
The new owner does not need to be in the US at the closing of the transaction when the property’s title is transferred to the new owner. Rather, the new owner can provide his or her representative, usually their real estate attorney, with “Power of Attorney” to complete the transaction. Alternately, if purchasing with an LLC, a Letter of Consent achieves the same result of allowing a representative to close the deal on behalf of the new owner. This is quite common and convenient for the buyer who does not want to come back to the US for the closing. Generally, we would attend the walk-through of the property on behalf of the buyer right before closing.
KEY TAKE AWAYS: